Airlines take the lease-back route to fund expansions

NEW DELHI: With most airlines lining up expansion plans, financing of aircraft has become an important issue. Many airlines are resorting to the 'sale and lease back' option which provides them breathing space to manage cash flows.

While low-cost carrier SpiceJet recently made a profit of Rs 92 crore through the sale and leaseback of 16 aircraft, Jet Airways made a profit of Rs 271 crore taking the similar route. Now other airlines such as Indigo, GoAir, Air Deccan and Kingfisher are also planning to use this option to meet their expansion plans.

Of course, the lease-back option only provides for immediate cash inflow. The cost of the aircraft, in any case, has to be paid over a period of time — through lease rentals instead of instalments for acquisition cost.

GoAir Said MD Jeh Wadia said, "We have signed a purchase agreement with Airbus for 20 aircraft. The delivery of aircraft will start in mid next year. We will be using both outright cash as well as sale & leaseback option to buy these aircraft."

In a sale and lease-back transaction, the aircraft is sold by the airline company to a third-party, which leases it back to the company for a rental. Since prices have gone up since the time Indian airlines placed huge orders last year, they end up earning a premium.

Indigo, which paid much less than 5% upfront payment in booking 100 planes, is also looking at this option. "We are inducting new aircraft through options like mortgage, operating lease, and sale and lease back.

We will not make any outright cash purchase," an Indigo official said. The sale and leaseback option may also give airlines short term liquidity if the price of aircraft increases from the time of booking to the time of sale resulting in profit.

No frills carrier SpiceJet, for instance, showed a profit of Rs 92 crore last week when it announced a sale and leaseback deal for 16 Boeing B737 aircraft valued at $1.1bn.

"Since the price of new aircraft has increased by 7% this year as compared to last year when the valuation of was done, we will get $20m (about Rs 92 crore) form our lessors as a premium over 22 months starting from January next year," SpiceJet chairman Siddhanta Sharma told ET.

Some analysts, however, believe that the leaseback option — while providing airlines short-term liquidity — it may result in higher lease rentals. "For example, if an airlines sells aircraft at profit instead of original price, then it will have to pay higher lease rentals when the same fleet is leased back," said Kapil Kaul, CEO for Indian Subcontinent & Middle East at the Centre for Asia Pacific Aviation .